Take advantage of the fee-free mortgage boost

Category:
Mortgages

Updated:
02/08/2016
First Published:
02/08/2016

With just over 3,500 mortgage deals on the market today, it can be very confusing for borrowers to work out the right option for them. However, our latest research shows that the number of deals without an arrangement fee has increased significantly, by 738 deals in just two years, so a cost-effective deal may have gotten a little bit easier to find – don't ignore them!

Fee-free mortgages can be a great way to keep your upfront costs in check, a particular advantage when you're faced with plenty of other costs such as legal fees, moving fees and valuation fees, all of which somehow need to be covered at an already expensive time.

Not only that, but unlike fee-paying deals, there'll be no temptation to add the fee to the mortgage balance – doing so could mean that you end up paying interest on the fee for the life of the mortgage, which could cost you far more in the long run. Fee-free has got to be a better option, and as the table below shows, there are plenty to choose from:

As you can see, the market is expanding rapidly, with fee-free offerings quickly becoming a key battleground. It's a whole new area for providers to compete in, and considering how costly mortgage fees can be, borrowers would be wise to take advantage.

"Borrowers have benefited from some of the lowest rates on the market in recent months, but the mortgage market now also boasts the largest number of fee-free deals to date, with lenders trying to compete in other ways than the traditional headline rates," said Charlotte Nelson, finance expert at Moneyfacts.

"With the average mortgage fee having increased by £53 in just one year to stand at £975, ignoring fee-free options could be a costly mistake. Unfortunately, getting the lowest rate possible is still the main focus for many borrowers, but many of these low-rate deals are often accompanied by a hefty fee. As a result, they can sometimes work out to be more expensive than the no-fee alternative."

Some calculations highlight this issue. Based on a £200,000 property price and a repayment only mortgage for 25 years, opting for the lowest rate mortgage at 75% loan-to-value (LTV) – which is currently from Yorkshire Building Society priced at 1.28% with a £1,475 fee – would result in a true cost of £8,489.24 after the first year.

Conversely, the lowest-priced fee-free alternative – a two-year fixed rate mortgage priced at 1.74% from Norwich & Peterborough Building Society – would cost just £7,403.64 after the first year, so the savings speak for themselves.

"Opting for the lowest deal without a fee would make a borrower £1,085.60 better off than just opting for the lowest deal in the market," said Charlotte, highlighting the importance of looking at more than the rate alone.

The fees themselves often come under fire too, and considering some clock in at £2,000 or more, it isn't hard to see why. The use of arrangement fees may allow lenders to offer more choice within a range, but administration costs don't vary greatly between deals, so many question what exactly these high fees are for.

"In today's market, borrowers are being told to switch deals once their fixed rate comes to an end," concludes Charlotte. "However, deals with fees can make switching mortgages a costly affair, particularly for borrowers who opt for a shorter-term mortgage. Therefore, borrowers would be wise to look at the true cost of the mortgage and to take into account any fees, to ensure the most cost-effective deal is obtained."

On 31 December, phase two of the Help to Buy initiative will be withdrawn from the market. It’s certainly done wonders for the high loan-to-value sector, so we thought we’d take a closer look at the significance of the scheme and the effect it’s had.